Quick read: The EU Emissions Trading System (EU ETS) puts a price on carbon for industrial sectors with high greenhouse gas emissions. With rising EU ETS prices and expanding coverage, companies must reduce Scope 1 emissions or face mounting costs. This guide breaks down what the EU ETS emissions trading system means for your business today.
The EU Emissions Trading System (EU ETS) has long been a cornerstone of Europe’s climate strategy, but its relevance has never been greater than it is today. As member states across the EU double down on net-zero and other climate change commitments set forth by the European Commission — including Germany’s constitutional pledge to reach net-zero by 2045 — the ETS has become more than just a regulatory mechanism. It’s a powerful market signal driving real economic consequences for companies operating in carbon-intensive sectors.
While the EU’s latest omnibus directive delays timelines for CSRD reporting, EU ETS is active now. This cap and trade system puts a price on the carbon market, influences operational decisions, and directly impacts Scope 1 emissions for regulated sectors like manufacturing, energy, chemicals, steel, and soon, shipping and transport. For companies aiming to future-proof their business, understanding the scope of the EU ETS is no longer optional.
What is the EU Emissions Trading System (EU ETS)?
The EU Emissions Trading System (EU ETS) is the cornerstone of the European carbon market, designed to reduce greenhouse gas emissions through a cap-and-trade mechanism.
Launched in 2005 in alignment with the Kyoto Protocol, it remains the world’s largest carbon market, covering intensive industries, heat generation, and other industrial sectors across the EU. The European Economic Area (EEA) extends the reach of the EU ET beyond the EU itself, allowing countries like Iceland, Liechtenstein, and Norway to participate. This means companies operating in these EEA countries must also comply with EU ETS rules, including emissions reporting, purchasing allowances, and meeting reduction targets.
Under this system, companies must obtain EU allowances to cover their emissions, creating a financial incentive to decarbonize. As part of the broader European Green Deal, the EU ETS covers a growing number of sectors and is a central tool in achieving EU climate targets, with evolving oversight from the European Parliament.
What the ETS means for larger EU-based enterprises
The EU ETS emissions trading system brings new compliance risks but also opens new opportunities.
As prices rise and compliance requirements shift, companies face growing pressure to decarbonize greenhouse gas emissions across their operations, invest in low-carbon technologies, and build emissions intelligence into core decision-making. Even companies outside the current scope are feeling secondhand effects through supply chain disruptions, investor expectations, and voluntary net-zero targets aligned with EU or SBTi standards.
Whether you're managing heavy industrial operations or charting a climate strategy at the board level, the EU ETS price signals are shaping the road ahead.
1. Increased costs for carbon emissions
Now that the EU ETS is in Phase 4 (2021–2030), the free allocation of carbon allowances is being gradually reduced. This means companies will need to adjust their number of allowances to cover their emissions.
As a result, carbon prices are expected to rise, increasing operational costs for industries with high energy consumption, such as manufacturing, energy production, steel, cement, and chemical sectors.
Businesses that fail to reduce their emissions effectively could face significant financial penalties or increased expenditure on carbon credits.
2. Inclusion of new sectors
The EU ETS will continue to expand to include the maritime sector, impacting shipping companies and industries reliant on maritime transport.
Starting in 2027, a new EU ETS 2 will apply to buildings and road transport, indirectly affecting businesses with large vehicle fleets, logistics operations, or extensive building infrastructure.
3. Pressure to accelerate decarbonization
Companies are now incentivized to invest in low-carbon technologies, energy efficiency improvements, and renewable energy to reduce emissions and mitigate rising costs, so innovation in green production processes will become crucial to maintaining competitiveness.
4. Supply chain impact
Larger companies may face pressure to monitor and manage their supply chains as suppliers with high emissions may pass on increased costs.
The Carbon Border Adjustment Mechanism (CBAM) — set to phase in starting 2026 — will impose carbon costs on imported goods, impacting companies reliant on global supply chains.
5. Reporting and compliance requirements
Companies must now meet stricter monitoring, reporting, and verification (MRV) standards to track their emissions accurately. Enhanced auditing and reporting obligations will require dedicated resources to ensure compliance.
6. Reputation and investor pressure
Companies with proactive decarbonization strategies may benefit from improved investor confidence, enhanced brand reputation, and better ESG ratings.
Conversely, firms failing to meet carbon reduction targets risk negative publicity, loss of investor trust, and potential exclusion from environmentally conscious investment portfolios.
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4 strategic recommendations for companies for organizations preparing for the EU Emissions Trading System
The evolving ETS presents both a financial challenge and an opportunity for innovation. Companies that adapt swiftly to decarbonization demands will gain a competitive edge in the green economy and within the EU carbon market:
- Invest in green technologies: Adopting energy-efficient systems and renewable energy can mitigate costs.
- Optimize operations: Streamlining processes and improving resource efficiency can reduce emissions:
- Develop carbon offset strategies: Engaging in carbon credit markets or investing in reforestation projects can provide offsets for unavoidable emissions.
- Monitor regulatory changes: Staying informed about EU ETS updates will help anticipate costs and compliance requirements.
A real-world example of EU ETS impact
A global leader in glass and chemicals manufacturing operates multiple production facilities across the EU, making it subject to the EU Emissions Trading System (EU ETS). They're using Pulsora for carbon data management and GHG quantification to help them navigate EU ETS mandates.
With Phase 4 of EU ETS (2021–2030) tightening carbon allowances and expanding sectoral coverage, this organization must navigate rising carbon costs and regulatory pressures while maintaining competitiveness by achieving the following:
Navigating higher carbon costs for glass manufacturing
The glass industry is energy-intensive, relying on high-temperature furnaces that predominantly use natural gas, a significant source of CO₂ emissions.
Under Phase 4, free allowances are gradually decreasing, meaning the glass manufacturer will need to purchase more carbon credits at market prices (which are projected to exceed €100 per ton by 2027). If emissions reduction measures are not accelerated, compliance costs could rise significantly, impacting profitability.
Achieving decarbonization through energy efficiency and alternative fuels
To counteract rising carbon costs, this organization is already investing in energy-efficient glass production processes and alternative fuels such as green hydrogen and biofuels.
The company’s commitment to sustainable production and removals, such as waste heat recovery systems and furnace efficiency upgrades, aligns with the EU ETS incentive structure, which favors companies that actively reduce emissions.
Mitigating impact of EU ETS 2 on supply chain
With EU ETS 2 (2027) covering buildings and road transport, the organization faces potential indirect cost increases due to higher carbon pricing in logistics and supply chain operations.
To mitigate these risks, the company may need to invest in low-carbon transport solutions, such as electrified or hydrogen-powered freight fleets, and collaborate with logistics partners focused on decarbonization.
Monitoring Carbon Border Adjustment Mechanism (CBAM) and other export challenges
Since this company exports products globally, the EU’s Carbon Border Adjustment Mechanism (CBAM) (phased in from 2026) will impact imported raw materials like soda ash and other high-emission inputs.
The company must monitor its supply chain to ensure they aren’t approaching or surpassing their emissions cap and consider regionalizing production to minimize exposure to carbon tariffs.
Taking advantage of green innovation and market opportunities
This organization has been developing low-carbon and recycled glass products to align with the EU’s circular economy policies and increasing sustainability-driven consumer demand.
By integrating carbon capture technology and expanding glass recycling initiatives, they can gain a competitive advantage in a regulatory environment favoring low-emission materials.
Stay ahead of evolving regulations with Pulsora
As the EU Emissions Trading System (EU ETS) continues to expand and carbon prices rise, companies can no longer afford to take a reactive approach to compliance. The organizations that thrive in this new era will be the ones that treat carbon management not just as a reporting obligation—but as a competitive advantage.
Pulsora helps leading enterprises stay ahead of climate regulations by turning fragmented emissions data into a centralized, audit-ready source of truth. With built-in support for Scope 1 emissions tracking, dynamic compliance workflows, and future-ready architecture, Pulsora enables sustainability teams to adapt quickly as frameworks like the EU ETS emissions trading system evolve.
Whether you're navigating EU ETS Phase 4, preparing for EU ETS 2, or setting company-wide net-zero targets, Pulsora gives you the flexibility and foresight to lead—not just comply.
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Frequently asked questions about the EU Emissions Trading System (EU ETS)
1. Who is required to report under the EU ETS?
The EU ETS currently applies to large emitters in sectors such as power generation, manufacturing (e.g. steel, cement, chemicals), aviation within the European Economic Area, and—starting in 2024—maritime transport. From 2027, EU ETS 2 will expand to include buildings and road transport. If your company operates in or relies heavily on these sectors, reporting and compliance obligations may apply.
2. What are the key upcoming EU ETS deadlines?
- 2024: Maritime transport is officially included in the EU ETS.
- 2026: The Carbon Border Adjustment Mechanism (CBAM) begins its transitional phase.
- 2027: Launch of EU ETS 2, covering buildings and road transport.
- 2030: End of Phase 4 with tightened caps and reduced free allowances.
3. What happens if a company fails to comply with EU ETS rules?
Non-compliance with EU ETS obligations—such as failing to report verified emissions or surrender sufficient allowances—can result in significant penalties. The standard fine is €100 per excess tonne of CO₂, plus the requirement to make up the shortfall the following year. Reputational and investor risks also increase for companies lagging behind in decarbonization.
4. How does EU ETS pricing affect corporate sustainability strategy?
The EU ETS price per tonne of CO₂ continues to rise, making carbon-intensive operations more expensive. This financial signal encourages companies to reduce Scope 1 emissions, invest in clean technologies, and rethink energy use. For companies with net-zero goals, aligning internal carbon pricing with ETS trends is becoming a best practice.
5. If my company isn’t directly regulated, should we still care about the EU ETS?
Yes. Even if your company isn’t directly mandated, the EU ETS indirectly affects supply chains, energy costs, and procurement decisions. Many companies voluntarily align with EU or national net-zero targets, following methodologies like SBTi, which emphasize Scope 1, 2, and 3 emissions reduction—areas the ETS helps quantify and drive action on.
